Vertical differentiation and collusion: Pruning or proliferation?

The B.E. Journal of Theoretical Economics

Tarola

2018

Self Cite

This paper studies the incentives of firms selling vertically differentiated products to merge. To this aim, we introduce a three-stage game in which, at the first stage, three independent firms can decide to merge with their competitors via a sequential game of coalition formation and, at the second and third stage, they can optimally revise their qualities and prices, respectively. We study whether such binding agreements (i.e. full or partial mergers) can be sustained as subgame perfect equilibria of the coalition formation game, and analyze their effects on equilibrium qualities, prices and profits. We find that, although profitable, the merger-to-monopoly of all firms is not an outcome of the finite-horizon negotiation, where only partial mergers arise. Moreover, we show that all stable mergers always include the firm initially producing the bottom quality good and reduce the number of variants on sale.

Section: A Brief Discussion Of Our Main Assumptionsmentioning

confidence: 99%

Endogenous Mergers in Markets with Vertically Differentiated Products

Gabszewicz

The B.E. Journal of Theoretical Economics

Tarola

2018

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“…Following this example, we assume in the following that when the aggregative rule applies, the proposed sharing rule will be e §ectively rescaled in accordance with the coalition that actually forms. 16 Apart from their relative simplicity, these two coalition formation rules are also attractive in that they describe two polar cases regarding how to respond to deviations. In particular, this approach allows to predict the outcome for any non-deviating Örm partition when coalition externalities are monotonic like in our setting.…”

Section: Endogenous Coalition Formationmentioning

confidence: 99%

“…The aggregative rule is also referred to as the delta-rule of coalition formation (see, e.g., Hart and Kurz (1983)). 16 The re-scaled sharing rule, r :…”

Section: Endogenous Coalition Formationmentioning

confidence: 99%

Cartel formation with quality differentiation

Bos

Mathematical Social Sciences

Saulle

2020

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Research on collusion in vertically di §erentiated markets is conducted under one or two potentially restrictive assumptions. Either there is a single industry-wide cartel or costs are assumed to be independent of quality or quantity. We explore the extent to which these assumptions are indeed restrictive by relaxing both. For a wide range of coalition structures, proÖt-maximizing cartels of any size price most of their lower quality products out of the market as long as production costs do not increase too much with quality. If these costs rise su¢ciently, however, then market share is maintained for all product variants. All cartel sizes may emerge in equilibrium when exclusively considering individual deviations, but the industry-wide cartel is the only one immune to deviations by coalitions of members. Overall, our Öndings suggest that Örms have a strong incentive to coordinate prices when the products involved are vertically di §erentiated.

“…Following this example, we assume in the following that when the aggregative rule applies, the proposed sharing rule will be e¤ectively rescaled in accordance with the coalition that actually forms. 16 Apart from their relative simplicity, these two coalition formation rules are also attractive in that they describe two polar cases regarding how to respond to deviations. In particular, this approach allows to predict the outcome for any non-deviating …rm partition when coalition externalities are monotonic like in our setting.…”

Section: Endogenous Coalition Formationmentioning

confidence: 99%

“…The aggregative rule is also referred to as the delta-rule of coalition formation (see, e.g., Hart and Kurz (1983)). 16 The re-scaled sharing rule, r : De…nition 1 (Individual or Nash stability) Coalition structure C = (fS 1 g; fS 2 g; ::; fS m g) is individually (or Nash) stable when C = S( ) for some such that for every …rm i 2 N and every alternative proposal 0 i it holds that…”

Section: Endogenous Coalition Formationmentioning

confidence: 99%

Cartel Formation with Quality Differentiation

Saulle

2019

SSRN Journal

Self Cite

Research on collusion in vertically di¤erentiated markets is conducted under one or two potentially restrictive assumptions. Either there is a single industry-wide cartel or costs are assumed to be independent of quality or quantity. We explore the extent to which these assumptions are indeed restrictive by relaxing both. For a wide range of coalition structures, pro…t-maximizing cartels of any size price most of their lower quality products out of the market as long as production costs do not increase too much with quality. If these costs rise su¢ ciently, however, then market share is maintained for all product variants. All cartel sizes may emerge in equilibrium when exclusively considering individual deviations, but the industry-wide cartel is the only one immune to deviations by coalitions of members. Overall, our …ndings suggest that …rms have a strong incentive to coordinate prices when the products involved are vertically di¤erentiated.